Limited Liability Corp (LLC) info

**wetwilly** · 07-27-2005, 11:43 AM

As an owner that rents out my property, it was suggested that I do a quit claim deed and set up an LLC for my property?!

Any info pro/con? Also, anyone have a good lawyer or source to set this up? I thought other owners might have info on this and others might find this info helpful. PM me if needed.

TIA for any info and/or help.

**Beach Runner** · 07-27-2005, 11:55 AM

We set up a F.L.P. (Family Limited Partnership or "flip") in the State of Georgia that owns our rental property. Our C.P.A. is also a lawyer, and he set it up for us to protect our assets, especially our primary residence. We also have a multi-million dollar umbrella insurance policy on the house to protect us in case of a lawsuit.

**TooFarTampa** · 07-27-2005, 12:17 PM

We did this. It was explained to us by our Tampa-area attorney (who in hindsight we would NOT recommend, so take it for what it's worth) that it eliminates our personal liability should someone sue us for being injured on our rental property. We own our rental house with other people and we all wanted to be personally protected (ie -- no one can go after our primary homes or other assets not in the name of the LLC) since the house is on the rental program and there are people in and out all the time.

It is a mini-business. We are registered with the state, and have to file every year. We do a tax return just for the LLC and have a bank account that we use for our rental income and all our expenses for the house. Your attorney can set up the articles of corporation or whatever they're called, and make sure you call your accountant so you know you aren't missing anything obvious from a tax standpoint.

It does complicate things if you want to sell and do a 1031 exchange, since I believe the property you are exchanging it for would also have to be in the name of the LLC. Don't quote me on that, but it is complex.

Also, if you have a mortgage, your loan would still be under your names. We could not find anyone to lend to us as an LLC, so we had to personally guarantee the loan before we could get one.

My husband and I own a lot in Seagrove just by ourselves, and we did not form an LLC for this purpose. Our homeowners' insurance gives us about $300K in liablility coverage should someone hurt themselves while trespassing on our lot, though I keep meaning to get a $1m umbrella policy, just in case.

**wetwilly** · 07-27-2005, 12:25 PM

Originally Posted by TooFarTampa

We did this. It was explained to us by our Tampa-area attorney (who in hindsight we would NOT recommend, so take it for what it's worth) that it eliminates our personal liability should someone sue us for being injured on our rental property. We own our rental house with other people and we all wanted to be personally protected (ie -- no one can go after our primary homes or other assets not in the name of the LLC) since the house is on the rental program and there are people in and out all the time.

It is a mini-business. We are registered with the state, and have to file every year. We do a tax return just for the LLC and have a bank account that we use for our rental income and all our expenses for the house. Your attorney can set up the articles of corporation or whatever they're called, and make sure you call your accountant so you know you aren't missing anything obvious from a tax standpoint.

It does complicate things if you want to sell and do a 1031 exchange, since I believe the property you are exchanging it for would also have to be in the name of the LLC. Don't quote me on that, but it is complex.

Also, if you have a mortgage, your loan would still be under your names. We could not find anyone to lend to us as an LLC, so we had to personally guarantee the loan before we could get one.

My husband and I own a lot in Seagrove just by ourselves, and we did not form an LLC for this purpose. Our homeowners' insurance gives us about $300K in liablility coverage should someone hurt themselves while trespassing on our lot, though I keep meaning to get a $1m umbrella policy, just in case.

Thanks for the info.

**GVM** · 07-27-2005, 12:50 PM

If I'm not mistaken...LLC's really no longer limit liability...if they ever did. I'm sure a lawyer out there can fill us in.

**Smiling JOe** · 07-27-2005, 01:47 PM

Originally Posted by GVM

If I'm not mistaken...LLC's really no longer limit liability...if they ever did. I'm sure a lawyer out there can fill us in.

I AM NOT A LAWYER!!

My understanding is that by creating a LLC to own the property, your personal liability is greatly reduced. However, any other properties owned under that LLC would be vulnerable to finacial attack in a lawsuit against the LLC, although your personal assets would not necessarily be at risk.

An time when an LLC does not limit your personal liability is when the business is owned by a LLC, yet you, the owner of the LLC, are directly responsible for injury to another person or damages. eg- Your LLC owns a boutique baby food business and you are the sole operator of the business, ie- You put the baby food in the jar. In your negligence, your tie clip accidentally drops into the batch of baby food, which later becomes lodged in an infants throat, thereby killing the infant. Your LLC will not offer any protection for you personally. You are liable.You would be suid and your LLC would be suid, and both would probably lose. I can think of real estate example, but they are not as vivid as this one.

**RiverOtter** · 07-27-2005, 02:17 PM

Originally Posted by Smiling JOe

In your negligence, your tie clip accidentally drops into the batch of baby food

Tie Clip :laughing1 You're dating yourself with that one SJ

**Donna** · 07-27-2005, 02:59 PM

We explored this in detail and with three attorneys and two CPAs. Decided against doing it for several reasons. First, the LLC does not protect your assets from an aggressive litigation. This is a myth. The attorneys make a lot of money on setting up these LLCs, work that is typically turned over to a paralegal. The LLC has no assets, therefore, litigators will go after the officers of the LLC. That would be you and any other partners in your real estate interest. The LLC is little more than a speedbump, if that, we were told by an attorney that had no personal gain in the advice he gave us. Another attorney told us, "There's not reason not to do it." (????)

The separate tax return is a pain. However, if you want to finance your house as a second home rather than as an investment property, having the separate tax filing can come in handy. Some people take advantage of a financing mechanism that approves the mortgage strictly on the basis of a very high credit rating, in order to avoid presenting an income statement on the property. You don't have to file any income statements whatsoever.

When you finance or refinance, lending institutions will not finance to an LLC, only to individuals. You have to flip the property in and out of title every time there is some form of financing mechanism invoked. Expensive, time consuming, and mistakes can be made every time the disposition of the property changes (see below).

Many of us have all real property held in a family trust. If you finance (or refinance), the property has to be removed from the trust and then returned to the trust after your closing. This requires work from our CA attorney and requires the efforts of a FL attorney, where the property is located, as well. It gets expensive and tiresome. Once, our CA attorney failed to return the property to the trust and that was really complicated to rectify, because several months passed with us assuming the law firm had taken care of this. Not so bad if everything is being handled in the same state and with the same attorney.

The only thing worse than needing an attorney is needing two of them on the same matter and at the same time.

**Beach Runner** · 07-27-2005, 03:12 PM

Donna, thanks for the info. Time for a heart-to-heart with our CPA/attorney, just to make sure we've POA.

**TooFarTampa** · 07-27-2005, 04:51 PM

I'm sure Donna is 100 percent right, especially her statement that it is just a way to generate fees, and the paperwork is shuffled away to paralegals. Our LLC docs were handled by a paralegal who was terrible. In hindsight I can't believe we ever closed on time. It is definitely something to explore in detail before you decide if it is right for you. Whether it was right for us, who knows -- the entire process of owning a rental home has been a learning experience!

The other thing I was wondering, since we had a claim under Ivan: It seems like since the insurance agent doesn't even know the names of those of us in the LLC, any claims would not impact our individual CLUE reports. (Meaning it probably would not impact our personal homeowners' rates.) In hurricane country, that might be a nice advantage. Though I guess if the CLUE people wanted to, they could find us in the LLC documents we filed with the state, since we are members of record.

**Paula** · 07-27-2005, 05:29 PM

This has been very helpful. I'm meeting with our lawyer sometime this summer to see about an LLC for our two rental properties. Two things I didn't know before reading this thread:

1. An LLC may not protect personal assets (however, would the LLC protect the rental properties if someone was hurt in our personal home or slipping on ice in the winter on our sidewalk -- by the way, we spend more every year hiring people to shovel our driveway and sidewalks throughout the winter than we spend on rebuilding beach accesses after hurricanes... and we've had to replace our roof and fix our leaking basement because of the melting snow and ice).

2. We may need to get a Florida attorney involved as well as our Michigan attorney. We trust our attorney, so I'll pass the information I learned on this thread by her.

Thanks.

**wetwilly** · 07-27-2005, 06:48 PM

Originally Posted by Paula

This has been very helpful. I'm meeting with our lawyer sometime this summer to see about an LLC for our two rental properties. Two things I didn't know before reading this thread:

1. An LLC may not protect personal assets (however, would the LLC protect the rental properties if someone was hurt in our personal home or slipping on ice in the winter on our sidewalk -- by the way, we spend more every year hiring people to shovel our driveway and sidewalks throughout the winter than we spend on rebuilding beach accesses after hurricanes... and we've had to replace our roof and fix our leaking basement because of the melting snow and ice).

2. We may need to get a Florida attorney involved as well as our Michigan attorney. We trust our attorney, so I'll pass the information I learned on this thread by her.

Thanks.

Please let us know what your attorney has to say about the LLC. I am glad I asked for help via this board and thanks to everyone who has/will contribute on this topic. It is kinda confusing and with lawyers making money on this ($500-1,000 a pop) I'm not sure they are the best ones to ask "should I do this....?". When I asked one that I was referred to, he said "it is up to you...it depends on your situation...".

No dis on lawyers so I hope no offense is taken...

**Paula** · 07-27-2005, 07:42 PM

I may not get to this until the end of summer or early fall, but I'll definitely pass on what I learn. I've heard that you're better off using an attorney rather than your account to create an LLC, but I can't remember who my sources were. Sounds like I need to be sure the attorney is well aware of the tax implications. We have no plans to sell our cottages and hope to just keep them in the family for decades (if possible, of course). So, ideally we won't be worrying about selling them. Although the issue of trusts may come into play.

**kurt** · 07-27-2005, 10:07 PM

You can register your LLC online in just a few minutes for less than $100 in FLA:

https://efile.sunbiz.org/corpweb/efiling/corefile.html

**Smiling JOe** · 07-27-2005, 10:33 PM

Originally Posted by kurt

You can register your LLC online in just a few minutes for less than $100 in FLA:

https://efile.sunbiz.org/corpweb/efiling/corefile.html

A friend of mine, and former attorney in Atlanta encouraged me to set up an LLC for my properties, and he gave me easy to follow, step by step instructions (maybe 5 steps in total) to set up an LLC. As Kurt mentioned, the fees to the State are about $100 per LLC when filing yourself. Some protection is better than no protection.

I think there are possible tax benefits from creating an LLC for your investment properties upon which your accountant should advise you. However, unless you know what you are doing, your Attorney should prepare your LLC docs, not your accountant.

Since TravelsToMuch is not an Economics Professor, but perhaps a Law or Real Estate Professor, perhaps he/she could help us out with some better answers regarding liability.

**30AOnline.com** · 07-30-2005, 04:41 PM

My CPA and my attorney have both suggested LLCs for several reasons. Of course, don't take my advise as legal advise. I am just conveying what I was told. My lawyer and my accountant are both old friends. The lawyer doesn't specialize in this area but he did work with some high profile DC firms that represented corporations defending against class action suits. My accountant friend was a very interesting person who had a habbit of saying "well you can do this, but I won't sign your return." Using him I alsways made sure that he'd sign the return... Anyway....The reasons I was given for setting up an LLC.

1) The ease of establishing and maintaining them.
2) They do offer protection of your personal assets. Nothing is 100% but they are supposed to offer as much personal protection as incorporating which is the point to an LLC.
3) You can form a separate LLC for each home preventing multiple homes from being at risk from events in another.
4) As a "Member" of an LLC(you are not an owner, a partner, a coporate executive or a sole proprietorship). You are technically a member. I was also told to set my wife up as as a member with 51% of the company. Then if there were ever any specific benefits for woman run companies we'd be eligible.
5) You don't have to keep board meetings, minutes, all that. The companies that form the LLC for you maintain anything required to keep the status of the LLC active. In some states like Nevada, the owner of an LLC is not public record.
6) As an LLC you can choose to be taxed as an individual or a corporation. Contrary to what was posted earlier in the thread, you do not have to file a separate return. You can simply file a Schedule C profit and loss from business form with your regular 1040. Obviously, none of you who'd be looking into this are going to be doing a 1040EZ or anything and you're all already filing deductions. Most likely, a good percentage are filing Schedule Cs already. So, no you don't have to file or pay tax or should I say your DOUBLE tax as a corporation. When I setup my LLC one of the main reasons was to replace my corporation. I was double taxed as a coporation because I had to file and pay corporate taxes on the corporations adjusted gross and then I had to pay personal taxes on what I personally was paid out of the corporation. The LLC gives you the personal perotection of a corporation as far as protecting assets and the anonymity but allows you to throw your income from the LLC on to your Schedule C and be taxed all together on your 1040 as an individual.

I know, I am sure there are lawyers out there that can penetrate the protection but those same lawyers can do the same with a corporation. It makes it more difficult. Let's face it, if someone has enough money for a legal battle they could probably find just about anything to focus in on and ruin you. I'm glad to see some judges slapping some serious frivolous lawsuit fines on people.